INTEGRATED - REPORT 2018 - RUN AIRPORTS DEVELOP AIRPORTS GROW OUR FOOTPRINT
INTEGRATED - REPORT 2018 - RUN AIRPORTS DEVELOP AIRPORTS GROW OUR FOOTPRINT
WWW.AIRPORTS.CO.ZA INTEGRATED REPORT 2018 RUN AIRPORTS DEVELOP AIRPORTS GROW OUR FOOTPRINT AIRPORTS COMPANY SOUTH AFRICA INTEGRATED REPORT 2018
Abbreviation Definition ACI Airports Council International ACSA Airports Company South Africa SOC Ltd AGM Annual general meeting AMC Airport management centre AMSIS Airport Management Share Incentive Scheme APEX Airport excellence in safety ASQ Airport Service Quality ATM Air traffic movements B-BBEE Broad-based black economic empowerment BFN Bram Fischer International Airport CEO Chief Executive Officer CFO Chief Financial Officer CIO Chief Information Officer Companies Act Companies Act, No.
71 of 2008 COO Chief Operating Officer CPG Contract participation goal CPI Consumer price index CSI Corporate social investment CSIA Chhatrapati Shivaji International Airport CTIA Cape Town International Airport DFI Development Finance Institution DoT Department of Transport EAP Economically active population EBITDA Earnings before interest, tax, depreciation and amortisation EIA Environmental impact assessment ELS East London Airport EMS Environmental management system ESAT Employee satisfaction survey ESD Enterprise supplier development GDP Gross domestic product GHG Greenhouse gas GRU Guarulhos International Airport GruPar Guarulhos Participações S.A Ha Hectares ICAO International Civil Aviation Organisation IFRS International Financial Reporting Standards IIA Institute of Internal Auditors IIRC International Integrated Reporting Council ISO International Standards Organisation IT Information technology KIM Kimberley Airport King IV King Code of Governance for South Africa 2016™ KPI Key performance indicator KSIA King Shaka International Airport LMJVC La Mercy Joint Venture Company LTI Long-term incentive MAP Million annual passengers MOI Memorandum of incorporation MOU Memorandum of understanding MIAL Mumbai International Airport Private Limited NTM National Transport Movement NBAC National bid adjudication committee NDP National Development Plan NEHAWU National Education, Health and Allied Workers Union NUMSA National Union of Metalworkers of South Africa ORTIA O.R.
Tambo International Airport PFMA Public Finance Management Act, No. 1 of 1999 PIC Public Investment Corporation PLZ Port Elizabeth International Airport (Pty) Ltd Proprietary Limited ROE Return on equity ROCE Return on capital employed SAIBPP South African Institute of Black Property Practitioners SAFA South African Football Association SANS South African National Standards SAATM Single African Air Transport Market SEE Social Economic and Environment SCM Supply chain management SED Socio-economic development SMEs Small and medium-sized enterprises SOC State-owned company SPE Special purpose entity STI Short-term incentive TAAG TAAG Angola Airlines (National Airline of Angola) TMPS Total measurable procurement spend UTN Upington International Airport AIRPORTS COMPANY SOUTH AFRICA GREYMATTER & FINCH # 12050
TABLE OF CONTENTS REFERENCE INFORMATION Online information Page reference Consolidated annual financial statements Assured by internal audit team Assured by independent external auditor ABOUT OUR INTEGRATED REPORT COMPANY OVERVIEW STRATEGY VALUE CREATION MODEL MATERIAL MATTERS TRANSFORMATION MESSAGE FROM THE ACTING CHAIRMAN MESSAGE FROM THE CHIEF EXECUTIVE OFFICER MESSAGE FROM THE ACTING CHIEF FINANCIAL OFFICER PERFORMANCE REVIEW GOVERNANCE AND REMUNERATION STATISTICAL REVIEW COMPANY INFORMATION 4 6 12 18 22 36 40 44 52 60 92 122 124 Develop airports Grow our footprint Run airports Our business Our people and society Our environment INTEGRATED REPORT 2018 1
HOW WE INTEGRATE Airports Company South Africa SOC Ltd (the Company) owns and manages nine South African airports. The Company is involved in equity investments abroad and provides technical advisory and consultancy services to other airports globally. Our majority shareholder is the South African Government (74.6%). In line with the government’s objectives, we focus on creating sustainable value that positively impacts our business, our people and society, and our environment over the short, medium and long term. We do this by managing the Company in an integrated manner. The diagram below illustrates how these processes inform our integrated thinking and our approach to reporting.Performance against strategy To reflect on the extent to which we have succeeded in delivering against our strategy, we provide performance feedback in the following sections of our report:
- Message from the Acting Chairman on page 42
- Message from the Chief Executive Officer on page 46
- Performance review on page 62
- Message from the Acting Chief Financial Officer on page 54 In these chapters, we also provide an outlook for expected future performance. Appropriate governance controls and oversight are in place throughout the Company to ensure effective control, and a strong sense of ethics and legitimacy, which is reflected in good performance. Refer to page 94 Remuneration We remunerate our people based on performance. This promotes the successful execution of our strategy.
- Refer to page 113. “Embedded in our strategy is our active contribution to the evolution of South Africa’s democracy and the empowerment of our country’s people.” Deon Botha Acting Chairman Refer to message on page 42. External focus Through our stakeholder engagement process, we seek to understand the needs and concerns of our valued stakeholders. Refer to page 29. Our commitment to stakeholders To build purposeful and responsive relationships with our stakeholders to achieve agreed outcomes that support sustainable value creation. The main concerns and focus areas raised during our stakeholder engagement processes were:
- Create value for shareholders
- Airport safety and security
- Understand passenger and partner needs
- Job creation
- Sound financial performance, governance and regulatory compliance Through our business review process, we gain an understanding of changing global trends and how these impact our operating environment.
- Refer to page 28. Internal focus Our inward focus is on the risks and opportunities highlighted by our enterprise risk management system. Refer to page 32.
- Regulatory environment
- IT platform
- Funding Holistic focus Our holistic understanding of the challenges our Company faces and the opportunities available for improvement and growth enables us to respond to material matters. Refer to page 25.
- Economic regulation
- Technology and digitisation
- New growth opportunities
- Safety and security
- Access to and cost of funding
- Transformation AIRPORTS COMPANY SOUTH AFRICA 2 INTEGRATED REPORT 2018 3 We ensure that our value creation model utilises resources and relationships (our capitals) optimally and is structured to enable strategy execution and value creation.
- Our strategic proposition Our strategy reflects our response plan in the short, medium and long term, by setting objectives and explaining how we aim to achieve them. Refer to page 15.
- Run airports
- Develop airports
- Grow airports Our pledge to our customers
- To embed a culture of service excellence
- To build an efficient customer-focused business, while contributing to socioeconomic development AIRPORTS COMPANY SOUTH AFRICA 2 INTEGRATED REPORT 2018 3
OUR REPORTING PHILOSOPHY We continuously strive to improve our reporting elements through disclosure and alignment to relevant reporting frameworks and best practice.
The Company seeks to provide investors and other stakeholders with relevant and material information about performance and our future prospects. OUR REPORTING SUITE The documents in the table below, including a digital version of the integrated report, can be found at www.airports.co.za or by scanning this QR code. ABOUT OUR INTEGRATED REPORT This integrated report (our primary report) Purpose and framework Scope and boundary Assurance A report to providers of financial capital and other stakeholders stipulating a long, medium and short-term view of value creation.The report was developed using the following frameworks and standards:
- IIRC’s International Integrated Reporting Framework
- Companies Act
- King IV
- ISO/SANS 31000 The report contains material information on Company performance across all areas of operation for the financial year 1 April 2017 to 31 March 2018 (the financial year). Our materiality determination process is defined on page 24 We disclose relevant internal and external factors that substantially influence our business where applicable.
- There were no restatements to comparatives unless otherwise stated. The financial reporting boundary was determined in accordance with IFRS.
- Management and governance oversight.
- The strategic objectives were internally and externally assured, and audited by the Auditor-General of South Africa as per the Public Audit Act of South Africa, No. 25 of 2004.
- The National Treasury’s Framework for Managing Programme Performance Information confirms that performance information is useful if indicators and targets are well defined, verifiable, attainable, specific, measurable, time bound and relevant. We considered these elements in finalising the information presented in this integrated report. The external audit opinion on the consolidated annual financial statements 2018 includes a summary of the work performed against our strategic objectives.
Our integrated reporting process has matured over the past five years to include quarterly integrated reports presented to the board by our Chief Executive Officer. This embeds the process of managing, measuring and reporting on our business, our people and society, and our environment, in line with our Sustainability Framework. FORWARD LOOKING STATEMENTS The forward-looking statements contained in this report, or oral statements that may be made by us or by officers, Directors, prescribed officers or employees acting on our behalf, constitute, or are based on, various or certain assumptions which might change or be subject to revision.
These statements involve risk and uncertainty, as they relate to events and circumstances that may or may not occur. Factors that could cause actual future results to differ materially from those in the forward-looking statements include, but are not limited to: global and domestic economic conditions; the nature of the aviation sector and specifically the performance of airline operators; changes in passenger profiles and choices; retail offerings; interest rates; credit and the associated risks of borrowing and funding; rating agencies’ outcomes; gross and operating margins; capital management; and competitive and economic regulatory factors.
Airports Company South Africa does not undertake to update or revise any of these forward-looking statements publicly, whether to reflect new information or future events or otherwise. The forward-looking statements have not been reviewed or reported on by the Company’s external auditor. BOARD APPROVAL The board acknowledges responsibility for overseeing the integrity and completeness of this integrated report and exercises this responsibility with the support of various sub‑committees. The board approved the reporting frameworks and materiality determination process applied the report. The board confirms that, after applying its collective mind to the preparation and presentation of the report and reviewing the content herein, it considers this report to be accurate, reliable and complete in presenting information and material matters.
The board concludes that this report is presented per the Framework and approved the 2018 integrated report on 30 July 2018.Supplementary reports Consolidated annual financial statements Purpose and framework Scope and boundary Assurance Reports on the current and prior year financial results and contains:
- Report of the audit and risk committee
- Directors’ responsibilities and approval
- Company Secretary’s certification
- Report of the Auditor-General to Parliament
- Directors’ report
- Consolidated annual financial statements The report was developed using the following frameworks and standards:
- Companies Act
- PFMA Consolidated financial results for the Company and all subsidiaries for the financial year ending 31 March 2018. The financial reporting boundary was determined in accordance with IFRS. Refer to the legal structure on page 10.
- Internal controls
- Management and governance oversight
- Internal audit
- External audit opinion Results presentation1 Provides investors with a high-level summary of:
- Operational performance
- Financial performance
- Short, medium and long-term strategy Value creation model1 Additional information on the value creation model. Board and executive curricula vitae1 A comprehensive overview of the skills and competencies of our board and Executive Committee members. 1
- These supplementary reports were not developed using any specific framework or standard and were subject to management oversight and internal control to ensure integrity of information.
Dirk Kunz Acting Chief Financial Officer Deon Botha Acting Chairman Bongani Maseko Chief Executive Officer If you wish to contribute to the improvement of our integrated report through comments, or if you have any queries, email Refentse Shinners, our Group Executive: Corporate Affairs at Refentse.Shinners@airports.co.za. FEEDBACK All reports in the table above, including a digital version of the integrated report, can be found at www.airports.co.za. AIRPORTS COMPANY SOUTH AFRICA 4 INTEGRATED REPORT 2018 5
INTEGRATED REPORT 2018 7 AIRPORTS COMPANY SOUTH AFRICA 6 COMPANY OVERVIEW “In July 2018, we celebrate the 25-year anniversary of Airports Company South Africa as a leading provider of airport services” Bongani Maseko Chief Executive Officer AIRPORTS COMPANY SOUTH AFRICA 6 INTEGRATED REPORT 2018 7
COMPANY OVERVIEW CONTINUED SOUTH AFRICA STATISTICS International airport Regional airport Equity investment or technical advisory and consultancy services Location Total annual departing passengers Annual passenger throughput capacity1 Aircraft landings Permanent employees On-time performance2 % ASQ3 ASQ category group average 1 O.R.Tambo International Airport 10 662 446 28 000 000 110 286 1 143 84.55 3.96 4.33 2 Cape Town International Airport 5 404 706 14 000 000 51 497 549 86.66 4.06 4.15 3 King Shaka International Airport 2 819 458 7 500 000 27 058 384 85.90 4.16 4.15 4 Port Elizabeth International Airport 821 735 2 000 000 26 992 122 84.10 4.00 4.14 5 Bram Fischer International Airport 199 095 600 000 9 936 68 79.35 3.87 4.14 6 Upington International Airport 33 113 100 000 3 671 23 83.80 4.28 4.14 7 East London Airport 411 373 1 200 000 13 521 67 81.13 3.92 4.14 8 George Airport 398 511 900 000 17 051 65 81.13 4.23 4.14 9 Kimberley Airport 86 415 200 000 4 445 45 77.38 3.76 4.14 Corporate – 423 – TOTAL 20 836 852 54 500 000 264 457 2 889 84.80 4.08 – GHANA The Company performs technical advisory and consultancy services at Kotoka International Airport in Accra.
BRAZIL Guarulhos International Airport in São Paulo is an equity investment. SOUTH AFRICA We operate nine airports and provide technical advisory and consultancy services for Mthatha and Wonderboom airports.
2016 284 285 2017 282 057 2018 264 457 Aircraft landings Departing passengers 2016 19 374 239 2017 20 001 961 2018 20 836 852 SOUTH AFRICA LEGEND INDIA Chhatrapati Shivaji International Airport in Mumbai is an equity investment. NOTE: 1 Annual passenger throughput capacity includes both arriving and departing passengers. 2 On-time performance is the percentage of aircraft departures within 15 minutes of their slot time. 3 Airport Service Quality (ASQ) is a programme operated by the Airports Council International (ACI). It is a globally established benchmarking programme measuring passengers’ satisfaction on a scale of 1 (poor) to 5 (excellent).
OUR GEOGRAPHIC FOOTPRINT OUR MANDATE Airports Company South Africa is mandated to undertake the acquisition, establishment, development, provision, maintenance, management, operation and control of any airport, any part of any airport, or any facility or service at any airport normally related to an airport function. This mandate is in line with the Airports Company Act, No. 44 of 1993, as amended. SHAREHOLDING The Company is a Schedule 2 public entity in terms of the PFMA and operates as a legally and financially autonomous company within the legal framework outlined in the Companies Act, No 71 of 2008.20.0% 74.6% 4.2% 1.2% South African Government: The Department of Transport is our primary shareholder. Public Investment Corporation (PIC): The PIC shareholding is held through ADR International Airports SA (Pty) Ltd, a wholly owned subsidiary of PIC. Empowerment investors:
- 1.2% G10 Investments (Pty) Ltd
- 1.4% African Harvest Strategic Investments
- 0.4% Pybus Thirty Four Investment (Pty) Ltd
- 0.8% Telle Investments (Pty) Ltd
- 0.4% Upfront Investments 64 (Pty) Ltd Staff share incentive scheme: Dormant as the scheme is being dissolved.
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Airports Company South Africa derives value from aeronautical and non-aeronautical operations, including local and international investments. This is structured as follows: 100%-owned subsidiaries1 Special purpose entities2 Investments in joint ventures5 Investments in associates6 Name ACSA Global Ltd Airports Consultancy and Advisory Services JIA Piazza Park (Pty) Ltd Precinct 2a (Pty) Ltd Lexshell 342 Investment Holdings (Pty) Ltd Airport Management Share Incentive Scheme (Pty) Ltd Sakhisizwe Community Programme Airport Logistics Property Holdings (Pty) Ltd La Mercy JV Property Investments Mumbai International Airport Private Limited Guarulhos International Airport Private Limited Purpose of existence The investment holding company through which Airports Company South Africa holds its 10% interest in the Mumbai International Airport Private Limited (refer to investments in associates on page 11.
The provision of airport consultancy and advisory services to airports in South Africa and internationally. This subsidiary will be leveraged to provide services for future prospects.
The holding company through which we operate the InterContinental Hotel at O.R. Tambo International Airport. A company through which we own approximately 250 hectares of land adjacent to O.R. Tambo International Airport. The strategy is to redevelop property for aeronautical and non‑aeronautical purposes to grow rental property income. An employee share option entity, wholly owned by the Airports Company South Africa Kagano Trust.3 Employee share incentive scheme that holds investments (specifically company ordinary shares) on behalf of the airport’s participating employees.4 Non-profit company (education).
A property holding company with the Bidvest group that owns three distribution warehouses at O.R. Tambo International Airport and Cape Town International Airport. A land development and property investment company in collaboration with Dube Trade Port Corporation. Our strategy is to build an investment property portfolio at King Shaka International Airport – Dube Trade Port through land-lease agreements.
A company through which we hold a 30-year concession (with the option to renew for another 30 years) to develop, operate and maintain the Mumbai Airport. A company in which we hold a 20-year concession to develop, operate and maintain the Guarulhos International Airport in São Paulo. We provide technical advisory and consultancy services. Year of inception 2005 2016 1998 1998 1999 1999 1996 2003 2009 2006 2012 Airports Company South Africa shareholding 100% 100% 100% 100% SPE SPE SPE 50% 40% 10% 10.2% Other shareholders and their respective shareholdings N/A N/A N/A N/A Airports Company South Africa Kagano Trust³ Airports Company Management Share Incentive Scheme Trust N/A Bidvest Holdings Ltd (50%) Dube Trade Port Corporation (60%) (GVK) (50.5%) Bidvest (13.5%) Airports Authority of India (26%) A joint venture between Investments e Participações em Infrastructura S.A (Invepar) (80%) and Airports Company South Africa (20%), which holds 51% of Guarulhos Participações S.A (GruPar) Equity injections R100 Nil R100 R100 Nil Nil Nil Nil R38 million R347 million R1.2 billion Net asset value at 31 March 2018 R541 million Nil R30 million R125 million (R2 million) R13 million R0.5 million R47 million R170 million R6.7 billion (R3.5 billion) ¹ Subsidiaries are all entities (including special purpose entities (SPEs)) over which the Company has the power to govern the financial and operating policies, generally with a shareholding of more than half of the voting rights.
An SPE is a subsidiary of the Company that attempts to isolate risk to the parent company by maintaining its assets and liabilities on a separate balance sheet. 3 The Airports Company South Africa Kagano Trust was formed under the Trust Property Control Act to administer the staff share scheme (until they were paid out in 2013), and to be a holding company with its two subsidiaries, Lexshell 342 and Lexshell 343. Lexshell 343, currently dormant, was specifically formed to hold Company share options should Airports Company South Africa list on the JSE. The Company intends repurchasing its ordinary shares from Lexshell 342 and possibly winding up the Kagano Trust, Lexshell 342 and Lexshell 343.
The Kagano Trust is dormant and has no beneficiaries.
OUR LEGAL STRUCTURE COMPANY OVERVIEW CONTINUED 4 Airport Management Share Incentive Scheme (AMSIS) exists only as a special purpose vehicle for the Management Trust and holds ordinary shares in Airports Company South Africa as an investment on behalf of its holding company, the Management Trust. The Management Trust is dormant and has no beneficiaries, as all beneficiary shares were bought back during 2009. The Company intends repurchasing its ordinary shares from AMSIS and thereafter possibly winding up the Management Trust and AMSIS. ⁵ Joint ventures are entities over which the Company has joint control over the economic activity through a contractual planning arrangement.
The Company recognises its interests in the joint venture using equity accounting. ⁶ Associates are all entities over which Airports Company South Africa has significant influence but not control, generally with a shareholding of between 20% and 50% of the voting rights. Investments in associations are accounted for using the equity method of accounting and are initially recognised at cost.
AIRPORTS COMPANY SOUTH AFRICA 10 INTEGRATED REPORT 2018 11
STRATEGY COMPANY OVERVIEW CONTINUED As a State-owned company, Airports Company South Africa has a greater mandate than simply delivering profitability for its shareholders. We are mandated to advance South Africa’s national agenda of economic growth and development while delivering a sustainably profitable business. We strive to fulfil this mandate by conducting our business in an ethical manner that enables inclusive growth and creates sustainable value for all our stakeholders. AIRPORTS COMPANY SOUTH AFRICA 12 INTEGRATED REPORT 2018 13
Strategy Our three-pillar strategy, namely to Run airports, Develop airports and Grow our footprint is supported by our Sustainability Framework. Each of these elements is aligned to our mission, vision and objectives. We implement our strategy and measure our performance against a set of strategic objectives and KPIs. Our mission To develop and manage world-class airport businesses for the benefit of all stakeholders. Our vision To be a world-leading airport business. Vision 2025 To be the most sought after partner in the world for the provision of sustainable airport management services by 2025.
Our values Our values are defined through the acronym PRIDE: Passion, Results, Integrity, Diversity, Excellence. Sustainability Framework Our Sustainability Framework comprises three elements that guide the fulfilment of our mandate and ensure that our decisions and actions support our journey towards Vision 2025: Our business Enhance our reputation, improve passenger experience, increase stakeholder satisfaction, contribute to airport traffic and diversify our business Our environment Minimise our environmental impact and strive to be carbon neutral Our people and society Contribute more to black economic empowerment and support black business growth; provide improved access to airports for South Africans; improve airport connectivity to the regions we serve; diversify our workforce; and create a positive environment Horizon 2 By 2025: Build emerging businesses and drive medium-term growth Horizon 3 Beyond 2025: Create viable options to ensure the Company’s success in future Horizon 1 By 2020: Extend and defend our businesses Long-term horizons Our strategy is implemented over three time horizons to create value over the short, medium and long-term.Strategic outcomes The effective application of our strategy will result in the following strategic outcomes:
- Long-term sustainable value creation
- Strengthening our reputation and continuing to build win‑win partnerships with our stakeholders
- Continuously improving the passenger experience
- Becoming a digitised business
- Identifying and securing new business opportunities
- Managing and developing a high-performance team
- Accelerating sustainability and transformation programmes
- Reducing our environmental impact Strategy map Our strategy map depicts our strategic objectives and KPIs in the context of our balanced scorecard. Our KPI performance in relation to our strategic pillars and Sustainability Framework is summarised on page 16.
Internal processes Organisational capacity Customer Financial STRATEGY CONTINUED Improve Leadership Culture Index Increase stakeholder satisfaction through effective partnership Run airports Promote regional integration and localisation of our airports Support black business entrepreneurship Maintain and improve our contribution to broad-based black economic empowerment (B-BBEE) Reduce our environmental impact Contribute to increase traffic through the airports we operate Improve connectivity to regions we serve Achieve demographically represented workforce Increase our reputation through demonstrated business excellence Create value for shareholders Develop airports Improve the passenger experience through demonstrated operational excellence Diversify business portfolio (2 & 3) Foster a positive employee workforce and environment Provide equitable access to safe airports in all South African regions to allow more people to fly Grow our footprint Our business Our environment Our people and society LEGEND Diversify business portfolio By running our airports efficiently and developing them innovatively, we will enhance the regional economy.
Improving our capacity and infrastructure grows our footprint through effective operation and partnerships. A larger footprint increases our exposure to diverse methods, allowing us to learn and grow, and improve the way we run airports. Our people and society AIRPORTS COMPANY SOUTH AFRICA 14 INTEGRATED REPORT 2018 15
- Our current strategic objectives, KPIs and initiatives We believe that our strategy should be responsive to our stakeholders’ needs and our changing business environment. We appointed a Chief Strategy and Performance Officer to strengthen the process of strategic development, implementation and monitoring in the Company. The following table summarises our performance related to the strategic pillars and Sustainability Framework, with more detail provided throughout the integrated report. Strategic objectives KPIs 2018 Initiatives delivered in 2018 Our business Target Actual Run airports Develop airports Grow our footprint Create value for shareholders Return on equity 4.2%
- Integrated data management across our airports to improve efficiency and effectiveness of airport management
- Implemented digitisation strategy to strengthen safety and enhance customer experience
- Strengthened stakeholder engagement with new key account model
- Embarked on R891 million infrastructure investment programme
- Strengthened project management for more effective project delivery
- Expanded provision of airport management services to Mthatha Airport and Kotoka International Airport in Ghana
- Formalised relationships with airport authorities in Cameroon, Liberia and Namibia
- Established Gauteng Route Development Committee and continued to collaborate with route development agencies in Western Cape, KwaZulu-Natal and Eastern Cape
- Secured new routes linking St Helena and Rome to Johannesburg, and Cologne to Cape Town; and expanded flight offerings on seven existing routes Diversify business portfolio Generate non-core income R58.8 million Non-aeronautical revenue as a percentage of total revenue 50% Increase our reputation through demonstrated business excellence Reputation Index ≥ 59 Increase stakeholder satisfaction through effective partnership Airport stakeholder satisfaction 3.7 Improve the passenger experience through demonstrated operational excellence Passenger satisfaction At least 7 ranked airports Improve connectivity to regions we serve Grow regional airport departing capacity 5% Contribute to increase traffic through the airports we operate Increase ORTIA connectivity 135 Provide equitable access to safe airports in all South African regions to allow more people to fly Participate in non-ACSA airports in South Africa 40 service man days Our people and society Promote regional integration and localisation of our airports Create job opportunities 22 414
- Implemented transformation sector strategies in property, retail, car parking, advertising, information technology and construction sectors to accelerate socio-economic growth
- Appointed ESD partner to facilitate transformation of supplier base
- Introduced measures to accelerate socio-economic growth in construction contracts
- Developed young talent and implemented talent mobility plan in support of business development Support black business entrepreneurship Grow black business share of operational and developmental spend 48% Grow black business share of commercial revenue generated 48% Maintain and improve our contribution to B-BBEE Achieve B-BBEE level Level 3 Improve Leadership Culture Index Leadership Culture Index ≥ 65% Achieve demographically represented workforce Promote employment equity 92.4% Foster a positive employee workforce and environment Employee satisfaction survey 3.8 Our environment Reduce our environmental impact ACI carbon accreditation level ACI level mapping KSIA and PLZ
- Achieved ACI Carbon level 1 re‑certification for four airports
- Preparing for level 2 accreditation
- Secured an uncontested environmental impact assessment for runway realignment project at Cape Town International Airport Target exceeded Target achieved Working towards achievement of target LEGEND STRATEGY CONTINUED AIRPORTS COMPANY SOUTH AFRICA 16 INTEGRATED REPORT 2018 17
VALUE CREATION MODEL We optimise our value creation model through the effective implementation of our strategy to achieve our strategic objectives and Vision 2025. AIRPORTS COMPANY SOUTH AFRICA 18 INTEGRATED REPORT 2018 19
- INPUTS The six capitals required to create value Financial
- Capital expenditure of R891 million
- Baa3 stable credit rating
- 4.2% return on equity
- 22% gearing ratio Manufactured
- Nine airports
- Capacity for 55 million passengers
- IT infrastructure Intellectual
- Technical advisory and consultancy
- Research and development
- Organisational change Our business Natural
- Water, fuel and electricity usage
- Water saving and augmentation plans
- Three photovoltaic plants
- Eight ISO14001:2015 certified airports Our environment Human
- 3 076 employees
- R40 million invested in skills development
- 93.3% black employees Social and relationship
- Seven sector-specific transformation strategies
- Stakeholder engagement
- R44 million invested in socio-economic development projects Our people and society EXTERNAL AND INDUSTRY INFLUENCES Influencing our playing field Global increase in air traffic Driven by population and GDP growth, middle-class growth, air service agreements and lower air fares Air transport market Competitive forces in the global, African and South African air transport markets Tourism Consistent increase in the number of foreign tourists and South Africans visiting destinations abroad Economic impacts Market activity and influences of global, African and South African economies Aeronautical
- Aircraft landing, parking and passenger services
- Cargo handling
- Passenger movement Non-aeronautical
- Retail, car rentals, parking and advertising
- Property management and rentals – hotels, ground handling, tenants, and airline Non-core
- Technical and advisory services, airport management solutions and training academy Our business
- Achieved 4.2% return on equity
- Improved Reputation Index
- Increased airport connectivity index for passengers
- Generated non-core income
- Achieved 49% non-aeronautical revenue as a percentage of total revenue
- B-BBEE Level 2
- Created 24 741 job opportunities Environmental impacts and advances
- Electricity consumption: photovoltaic plants provide electricity to national grid
- Water consumption
- Fuel consumption Our environment
- ACI carbon re-certification at four airports
- Medium impact noise pollution
- Decreased fauna and flora diversity
- Reduction in available water Societal Support socio-economic transformation through:
- CSI initiatives
- Preferential procurement
- Skills development
- Education support
- Multi-modal transport access Our people and society
- Demographically representative employees
- Positive and accountable leaders
- Reputation score of 63.1
- 259 additional job opportunities created for young talent OUTPUTS Our products, services and by-products OUTCOMES The inherent consequences of our activities VALUE CREATED To all our stakeholders We have created value and contributed to inclusive growth in South Africa1 :
- R9.5 BILLION to GDP
- R2.3 BILLION in taxes
- R2.8 BILLION in income to South African employees
- Government was our largest beneficiary at 42% of value distributed We also comply with 12 of the 17 UN Sustainable Development Goals (SDGs).
- 1 Airports Company South Africa Social, Economic and Environmental impact study for FY2017 How to read the value creation model: Review information from left to right for a complete picture of our business model and value creation process. Where relevant, references to more detailed information are provided. TRANSFORMATION INTENT Imperatives that determine our definition of value Transformation imperatives are aligned to the NDP imperatives: SOCIAL IMPERATIVE Socio-economic activities that empower communities to lead better lives MORAL IMPERATIVE Fair and equal opportunity for the economically active, free of discrimination ECONOMIC IMPERATIVE Changing the face of business to reflect South Africa’s demographics by supporting and developing SMEs through company-specific strategies in these sectors:
- Car rental
- Ground handling Our governance framework and operating model ensure
- An ethical culture
- Effective leadership
- Governance over all functional areas
- Appropriately composed governance structures ACTIVITIES The value chain activities and processes BUSINESS MANAGEMENT Strategy and performance Integrated governance Corporate affairs Transformation BUSINESS OPERATIONS Infrastructure asset management Airport management Enterprise security Business development Technical service solutions Our three-pillar strategy is implemented:
- Run airports
- Develop airports
- Grow airports VALUE CREATION MODEL CONTINUED Supply chain management Information Technology Financial Management Human Resources BUSINESS ENABLEMENT AIRPORTS COMPANY SOUTH AFRICA 20 INTEGRATED REPORT 2018 21
MATERIAL MATTERS We consider matters to be material if they have the potential to substantially affect our ability to implement our strategy as a State-owned company and fulfil our commitment to creating and sustaining value for our stakeholders over the short, medium and long-term. AIRPORTS COMPANY SOUTH AFRICA 22 INTEGRATED REPORT 2018 23
Business environment We assess local and global business conditions that have the potential to affect our business negatively or positively. This includes regular reviews of global megatrends, aviation-specific trends and high-impact events.
Refer to page 28. Stakeholder engagement We identify our stakeholders, review and analyse their concerns and needs in relation to our operating context, and engage with them. This process enables the Company to develop and sustain positive, value-creating relationships with stakeholders. Refer to page 29.
Risks and opportunities A comprehensive risk analysis of our business informs our assessment of materiality and strategic decisions. Refer to page 33. HOW WE DETERMINE MATERIALITY Our material matters, which include risks and opportunities, are derived through an integrated assessment process conducted by our executives and approved by the board within the context of our overarching governance framework and operating model. This process is depicted below, followed by a more detailed discussion on each stage of the process.
- HOW OUR RESPONSE TO MATERIAL MATTERS CREATES VALUE Our strategy is informed by our material matters. Throughout this report, we demonstrate how our strategic objectives generate sustainable value for our Company, our stakeholders and the broader society in which we operate. The following table demonstrates our strategic response to our material matters, the impact on stakeholders, and the trade-offs that were necessary to create value during 2018 and in the medium and longer term. AIRPORTS COMPANY SOUTH AFRICA 24 IDENTIFY RELEVANT INTERNAL AND EXTERNAL MATTERS Business environment, risks and opportunities
- Growing demand for air travel increases opportunity but places pressure on airport infrastructure
- Regulated charges for the use of airport facilities limit our ability to manage our core revenue
- Digitisation enables efficient airport operation but increases risk of disruption and cyber-crime
- Safety and security incidents threaten airport operations, passengers, tenants and employees
- We are mandated to operate ethically and to facilitate inclusive growth in South Africa Material matters Our response to risks and opportunities in 2018 Impact of our response on stakeholders in 2018 and beyond Our desired outcome Trade-offs to achieve our desired outcome Economic regulation
- Active engagement with Regulating Committee
- Prudent financial planning to mitigate tariff reduction
- Appropriate revenue decision outcomes enable us to achieve our financial goals and maintain service levels
- Achieve return on equity target
- Improve Reputation Index 35.5% tariff decrease mitigated by traffic growth and financial management Delay in the Permission Decision may impact future service Technology and digitisation
- Digital strategy implemented to improve operational efficiency and customer service
- External expertise appointed
- Use of innovative technology enables us to respond to customer needs for efficiency and safety and defend our competitive position
- Achieve return on equity target
- Improved Reputation Index Investment in digital strategy enabled improvement in IT maturity assessment Safety and security
- Integrated data solutions implemented to strengthen safety and security
- Partnership established with law enforcement agencies
- Major safety incidents or security breaches - threat prevention and response procedures in place.
- Focused on improving airport stakeholder and passenger safety Investment in digitisation to improve safety and security Transformation
- Accelerated transformation sector strategies
- Employee housing benefits
- Employee transport solutions implemented
- Continued approach to contract with ESD suppliers.
- 2 038 direct and 10 810 indirect jobs created
- 37% of employees benefit from housing solutions
- Employees will benefit from new transport solution
- Create job opportunities
- Grow black business share of operational and developmental spend and commercial revenue
- Achieve B-BBEE level
- Promote employment equity Invested R110 million in transformation initiatives, despite constraints in our business environment RUN AIRPORTS MATERIAL MATTERS CONTINUED Magnitude of effect and likelihood of occurrence We classify our material matters by assessing the relevant internal and external matters identified according to the magnitude of their effect and the likelihood of their occurrence. Refer to page 34.
ASSESS MATERIAL MATTERS Material matters The result of our integrated materiality determination process is a set of clearly defined and prioritised material risks and opportunities that inform our strategy and have the potential to influence the execution of our strategic objectives. Refer to page 35. PRIORITISE MATERIAL MATTERS AIRPORTS COMPANY SOUTH AFRICA 24 INTEGRATED REPORT 2018 25
- Business environment, risks and opportunities
- Slow economic growth
- Increasing air service agreements and competition in Africa
- Medium to long-term regulatory uncertainty
- Opportunity to reduce concentration in core revenue by diversifying revenue sources Material matters Our response to risks and opportunities in 2018 Impact of our response on stakeholders in 2018 and beyond Our desired outcome Trade-offs to achieve our desired outcome New growth opportunities
- Increased engagement with African airports
- Increased provision of advisory services globally
- Expanding capacity of major domestic airports
- Engaging with industry associations and airline partners and developing longer term aerotropolis plans to stimulate economic growth
- By diversifying revenue, we reduce dependence on aeronautical revenue, and strengthen long-term sustainability
- Growing our airports and developing economic opportunities around them stimulates regional growth and uplifts local communities
- Achieve return on equity target
- Generate non-core income
- Grow non-aeronautical revenue
- Grow regional airport departing capacity
- Increase O.R. Tambo International Airport (ORTIA) connectivity
- Participate in non-Airports Company South Africa airports in South Africa
- Create job opportunities Increased non-core revenue to R59.8 million (target: R58.8 million) and aeronautical revenue to 49% of total revenue, but did not meet the 50% KPI target .
- Detailed information on strategic objectives and KPIs is available on pages 16 to 17. Business environment, risks and opportunities
- Growing demand will continue to increase pressure on airport infrastructure
- Regulating Committee’s approval of airport charges provides planning certainty, but delayed approval may impact our ability to provide excellent customer service
- Negative perceptions of South Africa and State-owned entities impact our ability to raise affordable funding
- Airport development contributes to inclusive growth in a socially constrained South Africa Material matters Our response to risks and opportunities in 2018 Impact of our response on stakeholders in 2018 and beyond Our desired outcome Trade-offs to achieve our desired outcome Economic regulation
- Engaged with Regulating Committee
- Entrenched more progressive supply chain management
- Tariff certainty until 2020 enabling infrastructure investment to maintain and expand airport facilities
- Achieve return on equity target
- Improved Reputation Index Delays in the Permission Decision and increasing passenger numbers may impact future service Access to and cost of funding
- Strengthened treasury stakeholder engagement
- Strengthened governance and operating model
- Prudent financial management to support funding requirements
- Infrastructure investment develops capacity to accommodate growth in demand for airport services
- Focus on improving airport stakeholder and passenger experience Invested R891 million in capital expenditure despite economic constraints and credit rating downgrade Transformation
- Introduced contract participation goals (CPGs) to transform construction supply chain
- Appointed ESD partner to drive transformation goals
- Achieved uncontested EIAs
- CPGs ensure transformation goals are met on projects
- EIAs protect environmental sustainability during airport development projects
- Create job opportunities
- Grow black business share of operational and developmental spend and commercial revenue
- Achieve B-BBEE level
- Promote employment equity
- Improve employee satisfaction R44 million invested in SED includes projects to offset socio-economic impact of Cape Town International Airport runway project DEVELOP AIRPORTS GROW OUR FOOTPRINT MATERIAL MATTERS CONTINUED AIRPORTS COMPANY SOUTH AFRICA 26 INTEGRATED REPORT 2018 27
IDENTIFY RELEVANT INTERNAL AND EXTERNAL MATTERS Business environment We consider internal and external matters in the assessment of our business environment. Our assessment includes an analysis of potential risks and opportunities in our environment and their impact on our stakeholders and our Company. The most significant of these are discussed below. Aviation sector Increasing demand for global air travel is driven by GDP growth, burgeoning middle-class populations, air service agreements in global and African markets, and lower air fares. This trend is reflected in consistent growth in recent years in the number of international visitors to South Africa and South Africans travelling to Africa or further afield.
While this presents a significant growth opportunity for our Company, the increasing demand places pressure on our airport facilities and requires additional investment in the maintenance and expansion of airport infrastructure.
Economic regulation Our ability to plan for the future, achieve our strategic objectives and create sustainable value depends on the regulation of the tariffs we charge for the use of our airport facilities and approval of our infrastructure investment programmes. In December 2016, the Regulating Committee promulgated a five-year tariff determination (Permission Decision) that lends stability to our operating horizon until 2020. This creates a base for the Company’s short-term financial and infrastructure investment planning, and our medium-term and long-term planning is conditional on the outcome of the 2019 to 2023 permission application which was submitted on 6 November 2017.
The regulatory decision received in August 2018 provides for an increase in airport charges of 5.8% in 2019 and no increases until 2021. The Company will continue to apply a conservative financial management approach to mitigate against the continuous unpredictability of regulatory decisions, which includes the rationalisation of the infrastructure investment programme from time to time. This is often unfortunate in light of the Industry capacity requirements based on traffic volume growth and the socio-economic benefits that such infrastructure investments would have resulted in. Refer to page 35 for details.
Economic environment Like all businesses, our Company is affected by economic trends, but we also have a responsibility to enable economic growth. As a State-owned company we are mandated by government to provide certain aeronautical transport services and to contribute positively to the South African economy. Growth in the domestic economy remains under pressure, despite signs of slow economic recovery reflected in 1.3% GDP growth during 2017. The downgrading of Airports Company South Africa’s credit rating, following that of the sovereign credit rating in April 2017 will make it more difficult for us to secure affordable funding in future.
Our revenue declined as a result of the 35.5% reduction in regulated airport charges but this was partially offset by growth in passenger numbers and an increase in non‑aeronautical revenue. Lower employee costs supported our drive to contain operational costs. Although confidence has improved since the election of Cyril Ramaphosa as President of South Africa, conditions in the domestic economy are likely to remain challenging, compounded by an increased focus on politics in the lead up to the 2019 General Election.
There were signs of recovery in many other economies in Africa following a loss of growth momentum in 2016. This should have a positive effect on our business activities in Ghana and improve our opportunities in other African economies. It is also likely to heighten competition in the continent’s airport industry. The Brazilian economy emerged from a recession during 2017. Sustained growth in 2018 is likely to impact positively on the performance of the GruPar consortium and reduce the need for additional funding.
Social environment Our Company operates in an economically constrained social environment.
To fulfil our mandate as an employer and a Stateowned company, we work with our partners to make airline access affordable and to improve skills development to benefit the Company and South Africa. Our transformation processes form part of our business operations as we seek to create value through inclusive growth that aligns the needs of our Company and our partners with those of other stakeholders, including the broader society in which we operate.
Technology Rapid advances in technology have the dual effect of improving efficiency and exposing businesses to the risk of disruption. Our ability to adopt innovative technology and leverage it for the purposes of safety, security, operational efficiency and improved customer service is critical to our global competitiveness and continued operation. We invested in new digital solutions to integrate our airport management systems and implemented a comprehensive strategy to support our intent to become a digitised business able to respond more effectively to opportunities and risk. More details are available on page 35.
Stakeholder engagement Management presents a stakeholder engagement report to the board quarterly through the social and ethics committee. Stakeholder engagement is managed by means of a board‑approved strategy, policy and procedures. Internal assurance of engagement processes identified minor administrative improvements. An action plan was drawn up and the improvements were implemented. Stakeholder engagement is key to determining our material matters and achieving our strategic objectives. We are committed to purposeful and responsive relationship building with our internal and external stakeholders to achieve expected outcomes that support sustainable value creation.
We strengthened our stakeholder relations strategy and engagement process with the introduction of a stakeholder relations policy which formalises our multi-level engagement plans. The engagement plans are implemented by our executives and business divisions which identify stakeholders relevant to their activities and appoint dedicated stakeholder champions to manage their engagement processes. A newly formed stakeholder relations team ensures that stakeholder centricity is embedded in the Company’s culture. The team monitors effective implementation of the stakeholder relations strategy according to defined KPIs.
Internal awareness and support are developed through workshops and various other interactions to ensure the strategy is implemented in line with our governance framework and operating model.The following key stakeholder events were conducted during the year:
- A multi-stakeholder survey engagement session with key stakeholders based on RepTrak® survey results. Refer to page 30
- A Company presentation to Parliament and meetings with the National Assembly’s Portfolio Committee on Transport
- A meeting between the new Minister of Transport, Dr Bonginkosi (Blade) Nzimande and the board
- Distribution of the first quarterly external stakeholder newsletter
- The launch of an annual Airports Company South Africa golf day to prioritise stakeholder engagement with non‑aviation industry stakeholders
- Business-to-business industry engagements and other stakeholder events A key focus for the year ahead will be to complete the implementation of our engagement plans and improve our performance with new stakeholder engagement software. Refer to page 112 for additional information on the governance of stakeholder engagement. The graphic outlines our stakeholders, their material expectations and concerns, and their role in our value creation process.
MATERIAL MATTERS CONTINUED AIRPORTS COMPANY SOUTH AFRICA 28 INTEGRATED REPORT 2018 29